Pakistan reaches staff-level agreement with IMF for $3bn in funding

Nine-month arrangement is subject to the approval of the Washington-based lender's board

A vegetable market in Karachi. Pakistan's annual inflation rate increased to a record 38 per cent in May. EPA

Pakistan has reached a staff-level agreement with the International Monetary Fund that will provide $3 billion in funds to help the country address its economic imbalances and restore stability.

The financing agreement is subject to the approval of the IMF Executive Board, with its consideration expected by mid-July, the Washington-based lender said on Friday.

Pakistan's parliament approved budget changes for the next fiscal year on June 25, which impose new taxes and reduce government spending that helped to secure IMF funding and avoid a possible default.

In March, Moody's Investors Service cut Pakistan's rating deeper into junk territory due to its deteriorating finances that raise the risk of it defaulting.

Fitch Ratings had also cut the country's rating to non-investment grade the month before.

The nine-month standby arrangement builds on reform and structural adjustment measures undertaken by the country, said Nathan Porter, who led the IMF staff team that met with Pakistani authorities.

It will support immediate efforts to shore up the economy after recent external shocks while preserving macroeconomic stability and providing a framework for financing from multilateral and bilateral partners, he said.

“The economy has faced several external shocks such as the catastrophic floods in 2022 that impacted the lives of millions of Pakistanis, and an international commodity price spike in the wake of Russia’s war in Ukraine,” Mr Porter said.

“As a result of these shocks, as well as some policy missteps – including shortages from constraints on the functioning of the FX [foreign currency] market – economic growth has stalled.”

Mr Porter said liquidity conditions in the electricity sector remained acute, amid a further build-up of arrears and frequent power cuts.

Pakistan's foreign exchange reserves held by the State Bank of Pakistan (SBP), the country's central bank, fell by about 12 per cent on a weekly basis to $3.5 billion as of June 16, enough to cover about a month of imports.

Inflation in the country remains high and despite efforts to reduce imports and the trade deficit, reserves have declined to very low levels, he said.

Pakistan's annual inflation rate increased to a record 38 per cent in May, the fourth consecutive month that consumer prices were more than 30 per cent.

Higher food and fuel costs have raised the cost of living.

Rising prices worldwide and delayed policy action by Pakistan's government have hit the country’s finances, leading to a significant exchange-rate depreciation, a surge in prices and an erosion of its foreign currency reserves.

On Monday, after parliament passed its adjusted budget, the central bank raised its key policy rate by 100 basis points, raising interest rates to 22 per cent.

Torrential rain and flooding in June, which left a third of the country partially submerged and killed more than 1,000 people, piled pressure on Pakistan's faltering economy.

Before the flooding, a weakening economy forced the government to raise fuel prices by more than 20 per cent this year.

The newly approved budget, which accounts for a primary surplus of about 0.4 per cent of gross domestic product, will strengthen the country's finances, which will enable greater social and development spending.

The 2024 fiscal budget broadens the tax base and increases tax collection from undertaxed sectors.

“It will be important that the budget is executed as planned, and [that] the authorities resist pressures for unbudgeted spending or tax exemptions in the period ahead,” Mr Porter said.

“The full and timely implementation of the programme will be critical for its success in light of the difficult challenges.”

The SBP should remain proactive to reduce inflation, which particularly affects the most vulnerable, and maintain a foreign exchange framework free of restrictions on payments and transfers for current international transactions and several currency practices, he said.

Moody's has forecast Pakistan's external financing needs for the rest of the fiscal year ending June 2023 at about $11 billion, including the outstanding $7 billion in external debt payments that are due.

The rating agency projects Pakistan's GDP growth at between zero per cent and 1 per cent for the country's 2023 fiscal year.